How big does a startup’s market need to be to make sense?

Recently I was talking to an entrepreneur and he was sharing his new idea. Now, the idea was sound and made sense but it immediately struck me as too small a market. There’s no perfect method to determining the size of a market opportunity but there’s plenty of information available.

Here’s how I like to think through if a market is large enough to go after:

• Do a bottom-up sales forecast
• Do a top-down opportunity evaluation (e.g. 100,000 potential customers and we’ll capture 5% of the market)
• Evaluate the likelihood of achieving $1 million in recurring gross margin by the fourth year (part of the definition of a successful business)
• Consider the market timing and risks of being too late as well as too early (ideally it’s small and fast growing)

So, it doesn’t need to be a billion dollar business but it does need to be large enough to build a sustainable, successful business in a reasonable amount of time.

What else? How big does a startup’s market need to be to make sense?